After Wave of U.S. Companies Merging with Foreign Corporations to Dodge U.S. Tax Responsibility, Including Iconic American Companies like Burger King, Senators Introduce Legislation To Remove Key Incentive for Companies to Invert
WASHINGTON–(ENEWSPF)–September 11, 2014. Yesterday, U.S. Senators Dick Durbin (D-IL) and Charles E. Schumer (D-NY) unveiled the text of their new legislative proposal to address the recent wave of corporate inversions, specifically targeting the practice of earnings stripping. In earnings stripping, one of the most egregious practices of corporate inversions, inverted companies load their U.S. subsidiary up with excessive debt that is “owed” to the foreign headquarters so they can deduct interest payments on this debt, further allowing the company to avoid paying U.S. taxes. In unveiling the text of the legislation, Schumer and Durbin cited the need to deter iconic American companies like Burger King from inverting and a recent Barclays report which estimated that if Walgreen’s had inverted, its total savings would have been $797 million annually, 98 percent of which would have been attributable to debt interest-related earnings stripping. The Schumer-Durbin legislation is the first Senate Democratic proposal to address the practice of earnings stripping by companies that move their domicile overseas and will work in harmony with Finance Chairman Wyden and Senator Levin’s efforts to put together a comprehensive package of legislative proposals to address corporate inversions. The Senators also noted that proposals to address the recent wave of corporate inversions must also be used as a bridge to comprehensive corporate tax reform.
“Earnings stripping is a particularly shady maneuver used in the growing trend of corporate tax dodging,” said Durbin. “Families and small businesses in Illinois and across the country don’t have teams of tax lawyers to shift their tax domiciles overseas, or shift their profits and debts on or off their books, or any other shifty schemes that increase the tax burden on the rest of us. That’s wrong, and this bill will help begin to right it.”
“Earnings stripping is the number one incentive driving the wave of inversions we’ve seen in recent months and we need to shut it down,” said Schumer. “This bill curtails the incentive for companies to use shady accounting gimmicks to avoid paying their U.S. tax obligations. The only way to solve this problem for good is passing legislation, and our preference is to work with our Republican colleagues to pass a strong bill.”
This legislation will address the practice of earnings stripping by inverted companies in two ways: First, it will serve as a deterrent for those considering an inversion, as they will no longer see that opportunity to avoid U.S. taxation post-inversion. Second, it will ensure the earliest invertors do not have a competitive advantage over their U.S. counterparts, applying to their future related-party transactions, as well.
Specifically, the legislation will:
Repeal the debt-to-equity safe harbor so that limitations on the interest expense deduction will apply to all inverters, regardless of their financial leverage;
Reduce the permitted net interest expense to no more than 25 percent (down from 50 percent) of the subsidiary’s adjusted taxable income;
Repeal the interest expense deduction carryforward and excess limitation carryforward so that inverters cannot take advantage of the deduction in future years; and
Require the U.S. subsidiary to obtain IRS preapproval annually on the terms of their related-party transactions for 10 years immediately following an inversion
The legislation is co-sponsored by Senators Sherrod Brown (D-OH), Chris Coons (D-DE), Jay Rockefeller (D-WV), Debbie Stabenow (D-MI), Ben Cardin (D-MD), Jack Reed (D-RI), Bob Menendez (D-NJ) and Edward Markey (D-MA).